Money Carnies
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- Published on Thursday, 23 August 2012 13:55
- Written by Sara Nunnally, Editor, Inside Investing Daily
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The world of monetary policy is not what it seems. It's a realm filled with smoke and mirrors... and the occasional bearded lady.
The world of finance holds wondrous things. The system can falter, crash and burn, turn to ash and be reborn, a monetary phoenix that streaks right toward the sun... again.
Banks can circumvent laws for years and then lobby to repeal those very laws -- and they can escape with more cash than they started with.
Regular Houdinis they are.
And this is the best part. Governments can turn lead into gold.
Case in point: government debt. From The Dollar Meltdown: Surviving the Impending Currency Crisis With Gold, Oil and Other Unconventional Investments, by Charles Goyette:
Alchemists of antiquity, who spent their entire lives trying but were never able to "goldify the lead," would have been in awe at the way modern central bankers "monetize the debt." This process of turning debt into money is truly an act of central banking wizardry.
The government runs deficits by spending more money than it has. The government's debts are then used as collateral for the creation of new money... The greater the government's debt, the more money the Fed can create.
In other words, let me spend more than I have and then use that debt to borrow more money.
This is not your ordinary bearded-lady carnival... Or maybe it is. Nothing is what it seems. These "money carnies" do math. They create monstrous equations and proofs and triangulate value. Except, instead of using real numbers, they're using promises and rainbows and maybe a little fire.
They put on a good show, but anyone paying too much attention will see the truth for what it is...
Debt is debt, not collateral.
But even brass can look like gold in the right firelight. And it seems like folks are willing to go along with the show. In Europe, Germany issued a negative-yield bond. The two-year bonds have a yield of -0.06%, and Germany sold $5.13 billion worth of them.
That means investors are perfectly willing to lose money on the deal.
And Germany's not the only country issuing negative interest rate bonds (NIRPs). The Netherlands, Switzerland and France have all gone negative.
Why do investors keep buying? Because they think bonds are safe.
"European bond investors are so shell-shocked that they'd rather park money in a bond that's guaranteed to only lose a miniscule amount, rather than risk losing more in a PIIGS [Portugal, Italy, Ireland, Greece and Spain] bond that actually pays some interest," write Eric Sprott and David Baker.
They have a point, but they're seeing only the beard on the face... not the glue.
Here's what they don't see.
Those German bonds are backed with money from banks in places like Spain. Let's let Eric Sprott explain:
A large portion of the bond investors participating in NIRP bond auctions are the banks. As the euro crisis has dragged on, banks in perceived "strong" countries like Germany and Switzerland have seen record inflows of deposits from banks in peripheral EU countries, like Spain. As most of these "strong country" banks have been hesitant to lend those deposits out (for obvious reasons), they are forced to park them in short-term government bonds.
In other words, these bonds that investors are already losing money on are sourced from money flowing from struggling countries.
Investing in these bonds makes less and less sense.
But hey, we're at a carnival, right? Let's get some caramel apples and move on.
Pay no attention to the failing banks in Spain. The government has already nationalized assets from three banks and rescued a fourth. The other 14 are waiting for the results of a mandatory stress test due out next month.
Don't peek behind the curtain of the next (and possibly final) Greece bailout. The country's Prime Minister Antonis Samaras will ask for a two-year extension of the bailout terms everyone agreed to last year. Will this be the last straw before Greece leaves the euro?
And definitely don't mind the Federal Reserve, whose minutes show that more stimulus "would likely be warranted fairly soon."
Paying attention would ruin everything... the soft glow of the fire blowers would seem a garish distraction to the money laundering and scale weighting going on under the big top.
And no one wants that, do they?
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